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BergstromÌýis one of thousands of Canadians who contributed to a FHSA in 2023, .

The down payment-builder is particularly popular among young people aged 25 to 34, who made up 57 per cent of the nearlyÌý484,320 tax filersÌýwho put money toward the FHSA in its first year.Ìý

But with it still being relatively new, you might be wondering, does it make sense for you? And waitÌý— what was that about free money?

Here’s what it’s all about, the upsides and downsides, and what your options are if you never end up buying that home.

How the First Home Savings Account works

The FHSA is designed to help individuals save for a down payment, and was introduced amid rising home prices.

It combines aspects of both the Tax-Free Savings Account (TFSA) and RRSP (Registered Retirement Savings Plan), saidÌýShannon Terrell, lead writer and spokesperson for Nerd Wallet Canada.

To open an FHSA you must be between 18 and 71 years old and a Canadian resident.ÌýWhat you make on it is tax free, and the money you put in is tax deductible.

“Especially now with the housing market feeling particularly inaccessible for a lot of first-time buyers, every dollar that can be saved or sheltered from tax really matters,”ÌýTerrell said.Ìý

You can put up to $8,000 per year into a FHSA, with a lifetime limit of $40,000.

If you make $60,000 a year and you put $8,000 into the FHSA, when you file your taxes that year you can reduce your taxable income to $52,000, addedÌýSilvi Woods,Ìýmanager of the financial planning team at Wealthsimple.

Be aware that you start accumulating contribution room (the maximum amount you can put in for a year) once you open the account,Ìýwhich is why you might consider opening one even if you don’t have the cash to spare, said Terrell, to “get the clock ticking.”

That’s what Bergstrom did, putting in about $250 in late 2023. Her unused room from that year carried forward, so she was able to contribute about $10,000 in 2024. She now puts in $1,200 a month.Ìý

Once you open the account you have 15 years, or until you turn 71, whichever comes first, to use it for a first home.Ìý

“The biggest restriction is that you must not own a home, you or your spouse or common-law partner can’t have owned a home this year or four calendar years prior,” added Wealthsimple’s Woods.

Although some young people like Bergstrom are taking advantage of the FHSA, there is still some confusion around how exactly it works, said Dan Broten,Ìýsenior vice-president and head of EQ Bank.

The bank recently conducted a nationally representative survey with Angus Reid Group and found a big “gap between awareness and action,” he said. More than 80 per cent of Canadians aged 18 to 34 had heard of the FHSA but fewer than one in five had opened one.

“What our data showed is that there’s still a lot of confusion around some of the technical elementsÌý— like contribution limits, lifetime maximums and how long someone can hold an FHSA,” he added.

“It’s worth taking the time to understand how it works and how it can fit into your bigger financial picture.”Ìý

The upsides

Unlike the Home Buyers’ÌýPlanÌý(HBP), which allows you to take money out of an RRSP for a home, you don’t need to pay the money back, said Woods, who is alsoÌýa certified financial planner and certified financial analyst.

But you can use it in combination with the HBP.

When you open an FHSA, you can decide what to do with the money. You can put it into a variety of different things, such as stocks, bonds or mutual funds, Terrell added. Or you can park it in a savings account, with just the interest on that.

If your investments grow to more than $40,000, you can take those earnings out tax free as well to purchase your first home. This is not considered over-contributing. For example, if your $40,000 turns into $50,000 over the years through wise investments, you can take out the full $50,000.

Terrell said people often don’t realize they can put their money to work like this, especially if they start early.

It’s also important to think about when you need the funds, as a longer time frame in general means it makes sense to take on more risk.

For example, if you know you won’t buy a home for 10 years, your investments would have time to recover from stock market losses.

But if you’re looking to purchase in the near future, you might want to look at a more conservative investment, like a Guaranteed Investment CertificateÌý(GIC), according toÌýTerrell.

You can also delay reporting contributions to reduce taxes in a future year, said Kevin Burkett, tax partner at BurkettÌý&ÌýCo. Chartered Professional Accountants in Victoria, B.C., as “unused room carries forward.”

For example, if you just graduated and are only making $15,000, and “you’re able to put a few thousand into an FHSA, you could claim that a couple years later when you actually are earning $40,000 a year and you want to lower your tax,” said Woods.Ìý

What to watch out forÌý

One thing to be careful about, saidÌýTerrell, is not over-contributing, or you’ll be taxed at one per cent per month on the excess amount.

You also need to be buying aÌýfirst home for yourself, not a rental property, when you pull the money out.

The account shouldn’t be treated as an emergency fund, or to dip into for big expenses like a wedding or car, said Woods.

That’s because if you remove the money for something other than a home, you’ll be taxed on the withdrawals.

If you are looking for something more flexible, said Woods, the TFSA is the product for you. If you can, you might want to consider opening both, Woods added.

What if I never buy a home?

BergstromÌýis optimistic that she’ll be able to save a down payment for a single-family home in Edmonton in a few years.

Her budget for her first home is up to $400,000.

But with Toronto’s prices, that dream is still unrealistic for many young people.

An FHSA is not going to magically put a $1.2-million semi in a good school district within your reach overnight.

The good news is that even if you don’t end up buying, you can transfer the money to your RRSP, said Terrell.

“It doesn’t even eat into your RRSP contribution room, so for a lot of folks it’s a win-win.”

Although popular among millennials and gen-Z, it’s an “overlooked tool” for older renters, because it can roll into retirement savings, said Woods.

Burkett often sees younger people asking for an RRSP because their parents have told them that’s the best option.

But even if they don’t ever want to own a home and are just trying to save for retirement, he’d still advise them to look at the FHSA.

“You really need to understand the characteristics of the plan, beyond just the simple name,” he said.